Global Economic Outlook

A weak rate of growth for lending and an improved combination of funding sources has made the local banking sector more resilient than in the lead up to the Lehman Brothers 2008 collapse, according to financial experts. The last four years have seen Australian banks improve and diversify their funding sources, as they have moved away from offshore investments. The focus on local funding has seen banks like Bankwest become more competitive in their offers in order to try and attract deposits. Conservative buyer behaviour and a focus on saving have resulted in a slower rate of credit growth effectively making for a better savings rate in the country. Despite the good feedback however there are major differences in opinion when it comes to the stability of the local economy, the government’s involvement and exactly where things are headed as we head towards the beginning of a new year.

The Treasury has advised the federal government to abandon its plans to return the budget to surplus as the steep decline in Australia’s growth rate puts revenue under threat. And, according to economists the claims about surplus are based on projections of what the economy should be growing at, but isn’t really at the moment. The news has come amid criticisms about the Gillard government’s commitment to returning the budget to surplus in a time where the market needs liquidity and a different order of priorities.

Global Budget Deficits

An international comparison of budget balances for the world’s advanced economies, spanning 2011 to 2017, shows that none of them are close to surplus and suggest that it will be many years before any of them get there. If the Australian government accepted the deficit however it would threaten its AAA rating. Critics claim that the local economy could not manage to balance the budget during the aftermath of the country’s biggest ever boom in resources, making the surplus highly unlikely to be attained during a recession.

On the other hand the reasons for the government wanting to avoid a deficit are obvious: once you drop into the “red” zone it becomes increasingly difficult to get out of it. As far as those in charge of the numbers are concerned this priority is a little out of touch in light of the economy’s most immediate needs.

Some experts argue that 2013 could be the year that Australia is hit by a recession. And any defence centred on the country’s low debt to gross domestic product ratio being its saving grace can be put to rest when you consider that both Ireland and Spain were both in this position not too long ago. But the infiltration of government money into their banking systems saw this come to an untimely end and critics are drawing parallels for the government to take note of.

Even so, the financial sector has been the top performer on this year’s ASX, so the stock exchange implies that there is no real immediate risk to be concerned about. But when you take a look at how dramatically the drop in the Chinese market has affected local trade the picture does become slightly more concerning. The Chinese slowdown has resulted in a significant loss of income in the Australian market, a pattern that has persisted for the best part of 2012.

While the housing market is expected to contribute to a resurgence in the economy by some, others argue that debt can only be useful if it can be paid back and have cast their doubts as to whether this is indeed possible in the current climate.

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